When his nursing home changed hands in 2017, 78-year-old Wallace Bitner said he assumed things would get better.

The East Pennsboro facility, formerly run by the Golden Living chain, had been one of the most cited nursing homes in Pennsylvania. In 2015, hygiene standards were so poor that state inspectors said they discovered maggots in a resident’s feeding tube.

But when Priority Healthcare Group, a New York-based chain, took over Golden LivingCenter-West Shore last year, Bitner said, it didn’t get better.

“It’s got worse,” he said, “in almost every regard.”

As PennLive explored, that’s true among nearly all of Golden Living’s 36 former facilities in Pennsylvania. Despite transferring licenses to other chains, most of those homes remained understaffed and mired in care-related problems. State inspectors cited them for problems, ranging from dirty conditions to supervisory failures that resulted in injuries to residents.

Priority said it’s dedicated to providing quality care. But families and nurses said otherwise. They said conditions were the same or worse than under Golden Living, the Arkansas-based company long accused of prioritizing profit over patient care.

Those problems, elderly care advocates said, highlight failures with how Pennsylvania regulates the industry. Critics have said the state should require higher levels of staffing and deny licenses to nursing homes with a history of poor care.

PennLive’s findings also shed light on a more vexing phenomenon across the nation’s multi-billion nursing home industry: Research shows that when poor-quality homes are sold, they rarely improve.

“It’s not uncommon, sadly — really sadly” said Robyn Grant, director of public policy and advocacy for the National Consumer Voice for Quality Long Term-Care. “If you think about residents in the facility who are already not getting good care, there’s terrible suffering in that.”

In a nation with a growing population of seniors, that phenomenon has major implications. By 2030, the U.S. Census Bureau predicted that adults older than 65 will outnumber children for the first time.

Russell McDaid, president and CEO of the Pennsylvania Healthcare Association

But the solution for halting America’s revolving door of bad nursing home care remains divisive.

The nursing home industry has argued the reason struggling nursing homes don’t improve under new owners has little to do with oversight. Instead, they said, it’s evidence of a different problem: state governments don’t provide enough funding.

“Nobody has enough money to provide the care they want to for Medicaid residents right now,” said Russell McDaid, president and CEO of the Pennsylvania Healthcare Association. “The state is not doing their part.”

While elderly care advocates said more funding may help, it’s useless without better oversight.

The cycle of bad care, they said, is rooted not just in lax punishments and poor vetting. The federal government and states aren’t doing enough, advocates said, to prevent chains from sacrificing patient care for profit.

“That’s part of what’s wrong with the system,” said Matt Yarnell, president of the SEIU Healthcare of Pennsylvania. “All the money is behind the curtain. This is our Medicare and Medicaid dollars funding these operations.”

Sean Simmers / PennLive

Claudia and Paul Whittaker’s father, DeWitt Whittaker, was a 92-year-old nursing home resident with dementia who was allowed to get outside the Golden Living Nursing Home and rolled down these front steps in his wheelchair to his death.

The research on what happens after poor quality nursing homes are sold is relatively clear.

In 2016, researchers at major universities analyzed thousands of nursing home sales between 1993 and 2010. They discovered frequently cited homes were repeatedly bought and sold. Those homes were cited just as many times after they were sold, the team found.

David Grabowski, a professor of health care policy at Harvard Medical School

“Once acquired it wasn’t really that the quality bottomed out,” said David Grabowski, a professor at Harvard Medical School, who was involved with the study. “It was really that it kept in this cycle of bad quality.”

Grabowski said he doesn’t know exactly why struggling nursing homes don’t improve under new owners, but he is sympathetic to cries for more funding.

America’s 15,000 nursing homes get most of their money from two government sources. The first, Medicare, managed by the feds, covers residents for short-term rehabilitation. The second, Medicaid, managed by states, covers residents for longer stays.

Grabowski said most low-quality homes had something in common — particularly high numbers of Medicaid residents.

Medicaid rates are handled differently by each state, but on average they all pay homes far less than Medicare, in some cases, roughly a third.

“It’s a big difference,” Grabowski said.

Grabowski said some homes may remain bad because they’re taken over by unscrupulous companies with no interest in improving them. But he said the bigger problem is likely Medicaid funding.

He said he suspected the buyers believed they could manage the homes better but were proven wrong. The result, he said, is a continuation of poor care and, in some cases, severe financial problems.

“A lot of these companies end up declaring bankruptcy,” Grabowski said. “These companies don’t seem to do well, and they only seem to hold these places for two or three years.”

Industry groups endorsed Grabowski’s theory. Ron Barth, the former chief executive of Leading Age PA, which represents nonprofit homes, said Pennsylvania has struggled since 2005. That was when Gov. Ed Rendell capped Medicaid spending on nursing homes.

Barth said he estimates homes lose an average of $25 per day on every Medicaid resident.

To compensate, Barth said, homes raised rates on private-pay residents. That strategy is at a breaking point. Many nonprofits can’t make ends meet, he said, and are selling to for-profit companies.

“We are in dire straits; the state is in dire straits,” Barth said. “When it comes to services for older adults, they are going to have to understand they have to put more resources into it.”

Russell McDaid, president and CEO of the Pennsylvania Healthcare Association, which represents for-profit homes, agreed.

Inadequate Medicaid funding is the major reason Golden Living had problems, McDaid said. He said it’s not surprising their homes have continued to have problems under new operators.

“The financial climate these facilities operate in has only gotten worse since Golden Living divested itself of these homes,” McDaid said.

But some said they are skeptical of that argument.

Charlene Harrington, professor emeritus of nursing and sociology at the University of California, San Francisco, has conducted extensive research on for-profit chains, including Golden Living.

She has a different theory for why bad nursing homes don’t improve under new owners.
“It’s a deliberate strategy to make money,” Harrington said.

Charlene Harrington, professor emeritus of nursing and sociology at the University of California, San Francisco

Harrington said she doesn’t dispute Grabowski’s belief that most Medicaid programs are not paying enough to nursing homes. But she said there’s an important nuance to that problem.

Harrington sympathized with the struggles of non-profits, which she said try to provide high staffing levels and fair wages. Because of low Medicaid funding, she said, many non-profits are forced to fundraise or set higher rates for private pay residents.

But she said she doubted low staffing in for-profit chains like Golden Living was due to Medicaid rates.

“They can blame it on the Medicaid rates, that’s very convenient,” Harrington said. “But other homes can have adequate staffing rates and they don’t pull it off as profit.”

Golden Living declined repeated requests to comment for this story.

Contrary to Grabowski’s theory, Harrington and elderly care advocates said the reason struggling homes don’t improve after they’re sold is they’re generally bought by investors with a clear strategy.

They buy the homes because they’re cheap, she said.

After the purchase, Harrington said, most chains rename and rebrand the homes but don’t change basic care. She added that because most states rarely penalize nursing homes, those companies face few repercussions.

While some nursing homes go bankrupt, Harrington said, those financial problems are often rooted in complex debt arrangements rather than government underfunding.

Harrington said chains typically divide their homes into separate management companies and real estate holding companies and then pay rent to subsidiaries.

“Then they get into trouble because they have too much debt financing and they are paying too high of rent,” Harrington said.

To prove their financial struggles, nursing homes cite figures in their cost reports. Homes file those reports annually with state and federal governments to calculate Medicaid and Medicare rates.

At first blush, a PennLive analysis of cost reports for Golden Living’s homes in Pennsylvania appears to support the industry’s claims.

Those 36 homes, PennLive found, had relatively high numbers of Medicaid residents.

And, true to the industry’s claims, most of those homes appeared only mildly profitable. In 2015, each generated an average profit margin of about 3.5 percent – or about $300,000.

In 2016, the year Golden Living started transferring homes to new operators, those facilities appear to have lost money. PennLive’s analysis found each home lost an average of $300,000.

But those numbers, Harrington and other critics said, don’t tell the entire story.

“The profit they are reporting is like the tip of the iceberg,” Harrington said.

In order to avoid scrutiny of their profit margins, nursing homes typically try to obscure them, researchers, lawyers and advocates told PennLive.

The most common method, they said, is for companies to set up subsidiaries and contract with them. For example, a chain might set up subsidiaries that provide pharmaceuticals or physical therapy to its homes.

The beauty of doing that, critics said, is that a chain can inflate the cost of those contracts. The result is they appear to be losing money while simultaneously raking in millions, critics said.

“A facility will point to its books and say, ‘Look, we are losing money here’,” said Grant, of the National Consumer Voice for Quality Long Term-Care. “But that’s not the case when you look at all these entities that they have under their corporate veil”.

Golden Living, critics said, has long been considered a master of those arrangements.

David Marks, a Texas-based attorney, reached a $71-million settlement with the company in 2017.

Marks and his team gained access to the company’s financial documents.

While it was difficult to determine the company’s profit margins, Marks said, it was clear millions of dollars were being diverted from patient care.

“All the money was funneled to the corporation,” Marks said. “In fact, any money that was not directly deposited into a corporate account was swept out of the local account when the balances got to a certain level.”

Overall, Marks said, his team found no connection between the needs of residents and the company’s staffing.

Public documents shed no light on how much profit Golden Living made in Pennsylvania, but its cost reports show a similar reliance on related party transactions.

PennLive found that while the company appeared to lose about $12 million in 2016, it paid $46 million to Golden Living subsidiaries for staffing, food, and other services.

The new operators of Golden Living’s homes also have spent millions on services from subsidiaries, cost reports show.

Guardian Elder Care, based in western Pennsylvania, took control of 14 of Golden Living’s 36 homes in late 2016. Those homes, as PennLive explored, remained as understaffed as they were under Golden Living.

Similar to Golden Living, Guardian appeared to lose money – or make only meager profits – on most of them. Each home generated an average of $80,000 in 2016.

At the same time, PennLive found, each home spent $1.4 million on goods and services from subsidiaries.

Guardian did not respond to repeated calls and emails for comment.

It isn’t clear whether other buyers of Golden Living’s homes have made similar use of subsidiaries. Cost reports for those companies were unavailable at the time this story was reported.

However, based on a PennLive analysis of cost reports for other homes operated by those chains, it’s likely they also play an important part of their operations.

PennLive found four out-of-state nursing homes run by Priority Healthcare Group spent more than $1 million on related party transactions.
Michael Fragin, a company spokesman, said that type of transaction was common across the industry.

“I would totally reject any insinuation or suggestion that there’s anything inappropriate about this structure,” Fragin said.

A Beaver County home run by CHMS Group – another buyer of Golden Living’s licenses – further illustrates those practices.

In 2013, the New York company bought a 600-bed home from Beaver County that lost nearly $2 million that year. The facility also was poorly staffed, according to metrics used by experts, but above Pennsylvania’s minimum requirements.

In the following two years, PennLive found, CHMS cut staffing to a point where it fell below state standards. At the same time, according to cost reports, the home turned a profit of $11.2 million.

PennLive also found the company spent an average of $1 million on subsidiaries and $5 million in rent to a real estate entity owned by CHMS.

Like Guardian Elder Care, CHMS did not respond to repeated calls and messages for comment.

Because of those practices, advocates said they’re skeptical of the industry’s claims that homes are underfunded.

The industry has been making those arguments for decades, said Richard Mollot, director of the Long Term Care Community Coalition, a New York-based advocacy group.

“Over and over again, you hear nursing homes saying they can’t provide better care, they can’t provide better staffing, or they don’t get enough money,” Mollot said. “But the fact of the matter is that the data shows in many ways that isn’t true.”

For some advocates it also comes down to a basic question: If struggling nursing homes are so unprofitable, why would investors keep buying them?

“It’s all about the profit,” said Brian Lee, executive director of Families for Better Care, an advocacy group based in Texas. “It’s always all about the money.”

Researchers and elderly care advocates said, however, it doesn’t have to be like that.

Those controls, they added, combined with tougher punishments, stronger vetting of licenses, and higher staffing requirements could break America’s cycle of bad nursing home care.

Harrington, the professor emeritus, said the overarching problem with financial oversight of the industry rests with the federal government.

“It’s costing them money in the long run,” Harrington said.

Harrington said the Centers for Medicare and Medicaid Services – which handles Medicare reimbursement – places few restrictions on how nursing homes spend Medicare dollars and rarely audits spending.

Based on PennLive’s analysis of 15,000 nursing home cost reports filed in 2015, the agency audited only 18 of them.

Harington said that lack of federal oversight renders state attempts to crack down on profiteering meaningless.

Pennsylvania, for instance, may do more than most states to prevent nursing homes from siphoning Medicaid dollars through subsidiaries.

The Department of Human Services, which handles Medicaid reimbursement, requires nursing homes to disclose any profit from those transactions. The department then attempts to exclude those profits when setting Medicaid rates.

Like many states, Pennsylvania also caps the amount of Medicaid dollars it pays to cover a home’s administrative costs. That means, in theory, nursing homes can’t inflate their administrative costs to siphon profit.

But Harrington said because the federal government doesn’t have similar rules on how nursing homes spend Medicare dollars or other sources of revenue, it has little impact on those practices.

Harrington said the same oversight gap exists for nursing homes that pay rent to subsidiaries, like the CHMS home in Beaver County.

Because Pennsylvania’s Medicaid rate only includes a small, fixed amount to cover a nursing home’s rent and other capital costs, the Department of Human Services saw no need to scrutinize it.

“By regulation we’re required to audit the cost reports for allowable costs – not revenues, not profit and loss, not rent,” said Peggy Morningstar, chief financial officer of the department’s Office of Long-term Living.

But because the federal government doesn’t examine those payments either, Harrington said, nursing homes can pay exorbitant rent to related business entities with impunity.

“It’s understandable that Medicaid should only care about their rate but someone should care about the overall expenditure,” Harrington said.

The solution, Harrington and other elderly care advocates said, is an overall cap on how much nursing homes can spend on profit and administrative costs.

A similar cap – known as a “medical loss ratio” by policymakers – was placed on health insurers following passage of the Affordable Care Act in 2010. It meant that only 20 percent of an insurer’s revenue could go to profits and administration.

If the federal government introduced a similar cap for nursing homes – coupled with increased disclosure requirements and annual auditing – advocates said it could ensure patient care isn’t sacrificed for profit.

“If we don’t have some limits on profits then there’s no way to have confidence that the appropriate resources are being put to staffing or resident care,” said Mollot, the New York-based advocate.

Beyond that, Harrington added, if states like Pennsylvania raised Medicaid rates, she suggested an important caveat – increases must be spent on staffing levels.

At the end of the day, Harrington and others argued, those measures could ensure that when nursing homes change hands they get better rather than worse.

“Because the issue is where does the money go?” Harrington said. “It’s not going to staffing based on the really low staffing levels.”

Sean Simmers / PennLive.com

The Golden Living center of Camp Hill.

Where do nursing homes get their money?

To truly understand how nursing home care works, you have to understand where their money comes from.

Here’s a brief explainer on how nursing homes in the U.S. are funded.

WHERE DOES THE MONEY COME FROM?

The average nursing home is funded by three major sources:

Medicaid: The state-run health insurance program for low-income people. While Medicaid is better known for covering the poor, it also covers long-term residents at nursing homes.

Medicare: The federally-run health insurance for adults over the age of 65. Medicare covers residents in nursing homes who are there for less than 100 days. Typically, Medicare covers an elderly person who had an operation, like hip surgery, and needs to spend a few weeks in a nursing home recovering.

Private payers: If you are a long-term resident who has too much in assets or retirement savings to qualify for Medicaid, nursing homes will generally charge residents a ‘private rate’ each month. When a resident’s assets are exhausted, Medicaid will then kick in and cover the resident’s stay.

Despite perceptions to the contrary, most residents in nursing homes are covered by state Medicaid programs, not federal Medicare.

WHY DOES IT MATTER WHO’S PAYING?

That difference is crucial because each payer source has different strings attached and pays very different amounts.

Federal Medicare pays significantly more than most state Medicaid programs and, according to nursing home researchers interviewed by PennLive, has fewer rules about how nursing homes can spend that money.

For that reason, many nursing homes have rehabilitation units to try to attract patients who need short-term rehabilitation after a hospital stay.

The nursing home industry complains that in general, state Medicaid programs pay homes far too little to cover the cost of care. They argue that forces them to provide either poor care or to raise costs for residents who are privately-paying to make up for that shortfall.

Elderly care advocates interviewed by PennLive, however, are skeptical. They believe there’s some truth to that but, at the same time, many for-profit homes appear to be undertaking accounting tricks to disguise their true profits.

The Pennsylvania Department of Human Services, for its part, believes Pennsylvania’s Medicaid funding is adequate.

HOW DOES MEDICAID FUNDING WORK IN PENNSYLVANIA?

Since 1965, when Medicaid was introduced, Medicaid’s payment system for nursing homes has continuously changed. The original federal statute allowed each state to design their own systems and that’s what happened: every state has a slightly different way of paying nursing homes (Medicaid, a national survey 1991)

Originally, many states used a ‘retrospective’ payment systems. This meant that a nursing home would bill the state for all the costs it incurred in looking after a resident on Medicaid.

In the 1970s and 1980s, however, state Medicaid offices began to move away from this system. They became increasingly concerned that nursing homes were inflating their costs or providing unnecessary care in order to maximize the bills they could send to the state. Those systems were replaced by “prospective payment systems.”

Under a prospective payment system, a state provides a daily rate to each nursing home based on how many Medicaid residents it has, how sick those residents are, and a few other factors. If a nursing home spends more than they’re given, they have to foot the bill themselves.

In 1996, Pennsylvania introduced its current system, known as the “case mix reimbursement” system. While Pennsylvania’s Department of Health inspects nursing homes, the Department of Human Services handles Medicaid reimbursement and auditing.

HOW DOES PA. CALCULATE ITS DAILY MEDICAID RATE?

The state Department of Human Services calculates the daily rate for nursing homes in Pennsylvania (known as a ‘per diem’) using a complex formula.

It involves roughly these steps:

FILING COST REPORTS: To calculate rates, each nursing home must submit a “cost report” annually to the Department of Human Services. In that report, a nursing home details its costs for three major categories: resident care costs, other resident related costs and administrative costs.

Those reports are not audited financial statements and provide murky detail on how much a nursing home is making in profit. Their major focus is simply declaring how much a nursing home has spent on various aspects of patient care.

Federal Medicare, under its own payment system, also requires nursing homes to file annual cost reports.

AVERAGING EXPENSES: The department audits those cost reports to make sure that their costs are allowed under Medicaid rules. It then averages the costs in a nursing home’s three most recent annual “audit reports” to determine what it should pay the nursing home for the next fiscal year.

ADJUSTING BASED ON SIMILAR HOMES: The department then adjusts that rate based on a nursing home’s “peer group.”

Because different regions of Pennsylvania are more expensive than others, different homes taken on healthier and sicker residents, and larger homes have economies of scale, the department assesses each home’s costs in the context of other similar homes.

ADDING CAPITAL COSTS: Lastly, to help nursing homes cover capital costs – like building repairs and improvements – Pennsylvania adds a “capital cost” payment to its daily rate. This part is less complex than the other parts; it’s largely a flat rate of $26,000 multiplied by the number of beds in a nursing home.

Nursing homes also get some “supplemental payments” from the state throughout the year but those are typically small compared to the daily Medicaid payment.

WHAT’S THE INDUSTRY’S PROBLEM WITH THE STATE’S MEDICAID FORMULA?

According to Pennsylvania’s nursing home industry, their key problem isn’t the formula itself; it’s how Pennsylvania has been adjusting it over the past decade.

In 2005, under Democratic Gov. Ed Rendell, Pennsylvania introduced a “Budget Adjustment Factor” to its reimbursement of nursing homes.

That factor, often known as “BAF” for short, caps the amount the state will pay for Medicaid based on the state budget that year.

Today, in essence, the BAF takes what each nursing home would be paid under Pennsylvania’s formula and reduces it by about 20 percent.

If they were being paid the full amount under the formula, the industry argues, it would fairly cover the costs of Medicaid residents. However, at present, they say, it costs a nursing home more to treat a Medicaid resident than what it’s paid each day to cover them.

SO SHOULD WE BE PAYING NURSING HOMES MORE UNDER MEDICAID?

That comes back to a key question: how much of the poor care in America’s nursing home industry is due to inadequate taxpayer funding and how much of it is due to for-profit chains that divert those funds to their profit margins?

A number of nursing home researchers and policy analysts, like professor David Grabowski at Harvard Medical School, empathize with nursing homes. There is little doubt, they say, that Medicare is a far more generous payer than Medicaid.

On the other hand, some researchers, like Charlene Harrington, professor emeritus of nursing and sociology at the University of California San Francisco, are skeptical that for-profit nursing homes are quite as poor as they say they are.

Harrington believes that, in general, most Medicaid programs likely do need to be paying nursing homes far more but that increases need to be coupled with better accountability by the federal government over all payer sources – be it Medicaid, Medicare, or revenue from private payers.

Without better oversight, any increase may simply increase profits of major nursing home chains without leading to any improve in patient care.

WHAT MAKES CRITICS SO SKEPTICAL THAT NURSING HOMES ARE MISSPENDING TAXPAYER MONEY?

The nursing home industry often points to their profit margins in Medicaid and Medicare cost reports as evidence that they’re underfunded. Those figures often shows homes barely breaking even or even making losses each year.

Most industry-funded analyses are based on those reports.

But nursing home researchers say those reports – which are not financial statements – provide a poor window to understanding nursing home profits.

Critics like Harrington say that nursing homes use a variety of methods to obscure how much they’re really making. The major methods include:

“Home office costs”: Under Medicaid and Medicare, nursing home chains are allowed to send money back to their parent company. These payments, called ‘home office costs’, are intended to cover centralized services that a chain’s headquarters provides each of its homes, like human resources or accounting. But critics say because these expenses are rarely scrutinized by Medicare or Medicaid offices, they’re frequently used by nursing homes to funnel profit.

Self-dealing through subsidiaries: Nursing home chains often set up subsidiary companies, like physical therapy contractors or pharmaceutical supply companies, and then contract services from those subsidiaries at their nursing homes. Critics argue that the companies then inflate the costs of those services, effectively funneling money to their parent company.

Leasing arrangements: For-profit nursing homes typically place the real estate of their homes under the ownership of separate limited liability companies or holding companies. This has two functions. Firstly, it isolates its assets so that its overall exposure is reduced if it’s sued for poor care. But secondly, it allows nursing homes to effectively pay themselves rent and thereby divert profit to their parent entity.

HOW CAN I SEE WHAT EACH NURSING HOME IS GETTING PAID DAILY BY MEDICAID?

About this investigation

That investigation was prompted in part by a 2015 lawsuit filed by Pennsylvania’s Attorney General against Golden Living and other nursing home chains in Pennsylvania. Three years after that lawsuit and two years after the publication of ‘Failing the Frail’, PennLive wanted to use Golden Living’s nursing homes as a lens to re-examine the state of Pennsylvania’s nursing home industry.

PennLive reporter Daniel Simmons-Ritchie discovered that Golden Living sold the licenses of all 36 of its homes to new operators. And, over eight months, based on interviews with more than a dozen families and residents, and an extensive analysis of state and federal records, PennLive found most of those homes had the same or more citations and lower staffing under new operators than under Golden Living. Two of the operators defended they are dedicated to providing quality care.

The timeliness of PennLive’s reporting was only heightened in April when one of the companies operating Golden Living’s former homes, Skyline Healthcare, went into receivership in Pennsylvania and other states, forcing state agencies to take emergency control of those homes to protect residents. That situation raised new questions about how closely Pennsylvania scrutinizes the financial stability of new nursing home operators.

Beyond that, as Simmons-Ritchie’s reporting progressed, he discovered that Golden Living may still be influencing care inside those homes: The company continues to own the real estate to all 36 of its home and it remains unknown how much control Golden Living may exert over the companies now managing those facilities.

PennLive ultimately concluded that three years after the Attorney General’s lawsuit, Pennsylvania appears to still be failing its frailest citizens.

REPORTING: Daniel Simmons-Ritchie is an investigative reporter with PennLive and the Patriot-News. He has earned state and national awards for work on a variety of subjects, including health care, criminal justice, and the environment.